PSA: Planning for Infrequent (Major) Expenses

[Midpack]

In many threads over the years on projecting spending in retirement, we see some folks who neglect those large but infrequent expenses that we cannot avoid entirely - and inevitably someone points that out. Threads that show projected spending that only include the typical frequent expenses for home maintenance, cars, insurance, entertainment, taxes, food, utilities, medical, charity, gifts, incidentals, etc. There are also large expenses most of us can't avoid but only occur every 3 to 20 years. It's hard to imagine anyone could avoid all of them for 20-30 years in retirement. Some examples like:

• buying/selling boats-planes-second homes,
• replacing cars periodically,
• replacing major appliances, HVAC, furniture, consumer electronics,
• home renovations
• relocation
• replacing roofs, repainting, fence repairs,
• extraordinary travel

I could go on and on.

So I thought I'd show some actual history. The point is not the amounts but the irregular nature of these expenses, you can't plan the timing of some of them. [Please look past the big spikes in ours, they involved buying and selling a boat, and a relocation/new home. Though I'd imagine some of you may choose to spend on new homes, boats, etc. along the way. The other irregular expenses are not insignificant IME.]

For us these irregular expenses amount to almost 20% of our annual spending on average, but they fluctuate considerably. Your number may be higher or lower, but I am guessing it will be significant.

So my point if for those who are planning retirement spending, don't forget to allow for those large but highly irregular expenses. Being off by 20% (our example) for 20-30 years could put a serious dent in your plan...

 

[joesxm3]

What was that negative year caused by?

 

[Midpack]

What was that negative year caused by?

Selling the boat we bought in 2014 (partly offset by other + spending).

 

[jollystomper]

This is one I reason my approach, for planning purposes before retirement:
- Looking back at least 10 years before retirement to see what your irregular expenses were, to help estimate what they might be in retirement
- Deliberately spending money on major likely "one time" irregular expenses (e.g. new roof, home renovations) in the few years before retirement, to have to less likely deal with them in retirement.
Not perfect, but may give one a better idea of things.

 

[athena53]

20% is probably about right for me. Some of the items you've noted can be moved a year or two in either direction or are discretionary- I replaced my countertops with quartz in 2020 when I was getting a large tax refund. I had the exterior repainted and a deck replaced last year- not urgent but the money was there and I know that if you let those go too long you end up with expensive problems.

OTOH, replacing the car when it developed transmission problems not worth fixing was NOT something to postpone. Neither were my dental implants when those were necessary. I'm grateful to have the resources for all of them.

 

[skyking1]

We are selling the old and building a new home in year 1, so I will be going chartless for a while. this yuuge cloud of dust won't settle out for 2 years
I hope to wrap all sorts of those irregulars into that time.

 

[jkern]

I've tracked spending (including non-routine) for over 30 years. My numbers are approximately 50% essentials, 25% routine spending, and 25% non-routine spending.

It's a challenge to get yearly averages since you need 10 to 20 years to include some major items. I use to count $1000/month for these expenses. More recently I count $1250 to $1500 per month. In the future I expect it to drop due to certain one time expenses that probably won't reoccur (kids college, kids weddings, new roof, new HVAC, etc.).

 

[Midpack]

I've tracked spending (including non-routine) for over 30 years. My numbers are approximately 50% essentials, 25% routine spending, and 25% non-routine spending.

It's a challenge to get yearly averages since you need 10 to 20 years to include some major items. I use to count $1000/month for these expenses. More recently I count $1250 to $1500 per month. In the future I expect it to drop due to certain one time expenses that probably won't reoccur (kids college, kids weddings, new roof, new HVAC, etc.).

+1. Wish I had that much historical data, but I think "50% essentials, 25% routine spending, and 25% non-routine spending" would be a good estimate for us. I also track discretionary vs non-discretionary so I can predict what expenses we could cut back on and still maintain essentials.

Most here know better, but I have seen a few threads that seemed to be cutting spending a little too fine showing what I'd consider essential expenses only. Not sustainable IMO.

 

[24601NoMore]

One potential approach for those who track and/or budget expenses is to create a category called "Lumpy Spending" (or similar) and separate out those costs. That way, your 'regular' / non-lumpy budget categories continue to track more typical and predictable costs.

Here are the key "Lumpy Spending" sub-categories we use to track the big $ purchases:

- Appliances
- Deck Staining & Repairs
- Home Improvement
- Home Repairs
- Legal Services
- Misc
- Moving Expenses
- Outdoor Equipment (tractor, leaf blowers, power tools, etc)
- Political Contributions
- Real Estate
- Travel (although in our budget, this is a separate, top level category)

We budget ~$10K/year for lumpy big budget spending, and so far that's been a workable number.

I also track all the discretionary, smaller things we buy that are also "lumpy" as they are not typical/recurring and use a category called "Shopping" to track those..key sub-categories include:

- Art Supplies (for wife's painting hobby)
- BBQ (my grilling / smoking hobby)
- Bedding
- Biking
- Cell phones & accessories
- Clothing (his & hers separately)
- Computer Hardware
- Cosmetics
- Electronics & Software
- Exercise & Fitness (smaller purchases..I may add a corresponding Lumpy sub-category for the big purchases like replacing our Elliptical machine which we'll probably need this year)
- Hiking (boots, etc)
- Home Purchases - Misc
- Kitchen Cookware & Appliances
- Lawn Tools (small < $250 or so..bigger ones go in Lumpy)
- Luggage
- Office Supplies
- Personal Care Appliances
- Photography
- Sporting Goods
- Tax Software
- Tools

These are also in a way "lumpy" and CAN add up to some reasonable $$ every year. Sure - not to the same level as the bigger categories..but still enough to become fairly significant.

Lastly, we have all the typical categories (utilities, healthcare, etc) that are more predictable and non-lumpy.

While predicting and/or budgeting lumpy expenses can be challenging, we do find breaking out the tracking separately to be helpful..

 

[Romer]

This is a great Public Service Announcement. I did strip out the big one time expenses (Car, Solar, New Garage, Kids wedding) in going over the last 4 years expenses.

Taking my expenses living the same way buying what we want, traveling a lot, then adding in Taxes and $20K for health insurance I came to $128K-$132K. I have budgeted $150K every year and know I can spend up to $170K every year if have to.

I figured some years would be $130K and some would be $170K based on these one time expenses. So I used $150K on average. Your PSA made me go back and look at that. This is based on a real low ROI of 2% and including inflation so if things are better then I can always spend more If things are worse, I can easily cut $10K and work through a negative ROI. I am fortunate to have a Pension that helps a lot.

 

[almosttime]

+1. Wish I had that much historical data, but I think "50% essentials, 25% routine spending, and 25% non-routine spending" would be a good estimate for us. I also track discretionary vs non-discretionary so I can predict what expenses we could cut back on and still maintain essentials.

Most here know better, but I have seen a few threads that seemed to be cutting spending a little too fine showing what I'd consider essential expenses only. Not sustainable IMO.

Thank you for this info. As a newly retired couple, I was figuring a low-ish annual withdrawal; anticipating bigger random spends along the way.

 

[11522914]

I have an odd way of doing this but it works for me.

Before I retired 3 years ago I made sure all appliances, major home repairs/improvements were no more than 4 years old so they would hopefully last awhile. I didn't get everything done but got most.

I have kept track of every dollar spent in Quicken since the early 90s so I have a good idea how much "lumpy" expenses should be.

I have an annual budget which includes a monthly expense towards Home Improvement/Repairs/Appliances and Auto Purchase. I wondered how I will track this.

I finally came up with a solution that works for me. In Quicken you can create Savings Goals. I created 2 savings goals - one for Home Improvement and one for Auto Purchase.

Each month I remove cash from my cash account in the amount of those 2 monthly expenses and add them to my savings goals. It really doesn't leave the cash account. Just an accounting trick.

But here's why I like doing this. Each month these count as an expense towards my annual budget and reduces my net worth. Basically the money in the savings goals account does not exist on any financial report I use in Quicken. I consider money gone - until I need it.

Then 5 years from now when I buy a 20k used car it won't affect my budget or net worth as it was already amortized. Same goes for any major home repair or appliance.

Hope this makes sense.

 

[Jerry1]

One other thing to keep in mind is taxes. My example:

I run right at the top of the 12% tax bracket. So, if I needed a new roof, say $10K, and my only way to pay for it was drawing from my IRA/401K, it would cost me 22% more just because I need to pay the taxes on the withdrawal. Since money is cheap right now, my main tool for dealing with this is to borrow money, however, having enough in your after tax account would probably be a better move. Either way, it’s one thing to budget for the expense, but don’t forget the tax planning.

 

[Midpack]

One other thing to keep in mind is taxes. My example:

I run right at the top of the 12% tax bracket. So, if I needed a new roof, say $10K, and my only way to pay for it was drawing from my IRA/401K, it would cost me 22% more just because I need to pay the taxes on the withdrawal. Since money is cheap right now, my main tool for dealing with this is to borrow money, however, having enough in your after tax account would probably be a better move. Either way, it’s one thing to budget for the expense, but don’t forget the tax planning.

Definitely. I’d say taxes, medical expenses and “lumpy expenses” (this thread topic) are the hardest to project over 20-30 years, but they’re substantial and therefore crucial to retirement financial planning. I’ve seen many ‘can I retire threads’ that show spending without seriously allowing for some/all three.

 

[Midpack]

One potential approach for those who track and/or budget expenses is to create a category called "Lumpy Spending" (or similar) and separate out those costs.

Love that term. How you account for lumpy spending isn’t central, making sure you’ve planned for it is…

 

[brett]

I do not think that planning for unexpected expenses in retirement is very different than doing it in pre retirement years.

Who has not had an appliance break down, a health expense, a car expense in prior to retirement?

Seems to me that is prudent, based on pre retirement experience, to include provision for this in one's retirement calculations.

 

[corn18]

I do not think that planning for unexpected expenses in retirement is very different than doing it in pre retirement years.

Who has not had an appliance break down, a health expense, a car expense in prior to retirement?

Seems to me that is prudent, based on pre retirement experience, to include provision for this in one's retirement calculations.

The difference pre and post retirement is income can replenish the lumpy spend.

I have a new car every 5 years. I have $2k / year for big home stuff. Our house is new so that might be less to start and more later on. We have a $25k / year excess that can be spent on whatever. Maybe one year that is a new patio, the next is nothing, the next is a home repair.

 

[Out of Steam]

I'm planning for us to begin transferring a "car payment" from our pre-tax retirement accounts to a savings account in 2022. It could be used for either a down payment on a new car or major repairs.

To my knowledge, we won't need to buy a new car this year, but spreading out the "lumpy" withdrawal will help with taxes.